We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Oregon becomes the second state to authorize benefit LLCs

This week Oregon became only the second state to authorize benefit LLCs, when Governor Kitzhaber signed House Bill 2296. Over a dozen states have authorized benefit corporations, but until now only Maryland had authorized benefit LLCs.

Benefit Corporations. Benefit corporations are intended to provide general public benefit in addition to the usual corporate principle of maximizing profits for the benefit of shareholders. They are new – in 2010 Maryland became the first state to pass benefit corporation legislation. There are variations in the state statutes, but they are based primarily on a model act proposed by B Lab. States that have passed benefit corporation legislation include California, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania. A benefit corporations bill was introduced in the Delaware legislature earlier this year.

Being a benefit corporation is not a simple or easy thing. In addition to the usual corporate requirements, a benefit corporation must have a corporate purpose to create a material positive impact on society and the environment. The directors’ duties are expanded to require consideration of the effects of the business on society and the environment. The benefit corporation must publish and make publicly available an annual report on the benefit corporation’s overall social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard.

Oregon’s New Law.Oregon’s new statute authorizes and sets forth the requirements for a “benefit company,” which can be either a corporation or an LLC. The requirements are similar to those of the model act for benefit corporations, with some variations. For example, the model act requires a two-thirds vote of shareholders, but the Oregon law requires only a majority vote of shareholders or members.

As with the model act, the Oregon law does not require any special terminology in the name of the benefit company. Dissenters’ rights are not available when an existing LLC or corporation converts to a benefit company. An LLC benefit company’s articles of organization or operating agreement may not vary the requirements of the Oregon law except to the extent they impose more stringent requirements.

Comment. Oregon’s benefit company approach will be useful for corporations, but it appears to be unnecessary for LLCs. LLCs, unlike corporations, are primarily contractual in nature. An LLC’s principal charter document is its operating agreement, which is a contract between its members.

LLCs are also an inherently flexible entity structure. Most LLC statutes recognize the importance of the members’ freedom to contractually establish the nature of their LLC. For example, the LLC acts of Delaware and Washington both state: “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Del. Code Ann. tit. 6, § 18-1101(b); Wash. Rev. Code § 25.15.800(2). Most states allow an LLC’s operating agreement to limit a member’s or manager’s fiduciary duties. E.g., Del. Code Ann. tit. 6, § 18-1101(c).

State LLC statutes generally recognize that the purpose of an LLC can be almost any legal objective. The Delaware LLC Act, for example, states: “A limited liability company may carry on any lawful business, purpose or activity, whether or not for profit, with the exception of the business of banking.” Del. Code Ann. tit. 6, § 18-106(a).

These attributes show that an LLC is not a “one size fits all” entity. Given an LLC’s malleable nature, there should be no need for a statutory authorization to allow an LLC to be a benefit company, à la the Oregon approach. Most state LLC acts appear broad enough already to allow the members to specify all the characteristics of a benefit corporation in their articles of organization and operating agreement.

It may be that there is more of a need for an LLC benefit company statute in Oregon, because the Oregon LLC Act does not authorize as broad a purpose for LLCs as most states do: “a limited liability company formed under this chapter may conduct or promote any lawful business or purpose which a partnership, corporation or professional corporation as defined in ORS 58.015 may conduct or promote, unless a more limited purpose is set forth in the articles of organization.” Or. Rev. Stat. § 63.074. Oregon corporations may only engage in a “lawful business,” id. § 60.074, and a partnership is “an association of two or more persons to carry on as co-owners a business for profit,” id. § 67.005(7).

Thus Oregon appears to require that an LLC have a business, profit-oriented purpose. But rather than create benefit companies for LLCs, a more straightforward approach would have been to simply amend Oregon’s LLC Act to allow a broader range of LLC purposes.